"We view Wal-Mart as the best supply-chain operator of all
time. Efficiency is a key factor in maintaining Wal-Mart's
low-price leadership among retailers. Their margins can be far lower
than other retailers' because they have such an efficient supply
chain. The company's cost of goods is 5 percent to 10 percent less
than that of most of its competitors," says Pete Abell, retail
research director for AMR Research Inc., Boston. [??] Turn-about is fair
play. With Bentonville, Arkansas-based Wal-Mart Stores Inc. petitioning
the Federal Deposit Insurance Corporation (FDIC) to get into the banking
business, it's only fair that banks take a few lessons from the
world's largest retailer as they seek to manage costs and attract
business in today's mortgage lending marketplace. [??] Wal-Mart
became the "best supply-chain operator of all time" by
following two fundamental strategies. First, it leverages its scale in
multiple ways to create operational efficiencies that drive significant
competitive advantage. Second, and less obviously, it uses its scale to
create additional competitive advantage through best execution and
supply-chain investments. [??] The first factor is the kind of pure
power play that banks understand well. Scale leads to bigger stores that
have more products and thus become more of a shopping destination--more
akin to a mall than a store that offers a narrower, more focused
selection. [??] Wal-Mart's overhead costs are distributed across a
bigger footprint, allowing it to price more aggressively while
maintaining good net margins. Scale gives a company a negotiating
advantage with suppliers, which supports aggressive pricing strategies.
Wal-Mart's leverage creates a snowball effect in which increasing
purchase volume leads to more selection and lower prices for customers,
leading to more purchase volume.

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In the lending industry, scale allows for more sales channels (loan
officers, call center, wholesale, correspondent, joint ventures and so
on) and a greater variety of product offerings (prime, alternative-A,
subprime, home-equity lines of credit, construction, etc.). Large
lenders are able to distribute fixed investment costs over larger
transaction volumes, and, in theory, scale should also drive operational
cost advantages. Yet most struggle to realize their potential economies
of scale because of the inherent limitations of legacy processes and
technological infrastructures (or lack thereof).

Whether it is brittle legacy infrastructure due to prior
merger-and-aqusition (M & A) activity, outdated point-of-sale (POS)
and loan origination systems (LOSes), or lingering channel and
organizational conflict, many lenders are actually burdened by their
size.

The irony is that developing a unified POS system for a full range
of products and channels isn't any more expensive for a megalender
than it is for a midsized lender, although potential return on
investment could be greater by orders of magnitude.

Far from being burdened by its size, Wal-Mart has put systems and
processes in place that have enabled it to take its scale advantages to
the next level to achieve unprecedented success. This is the second
factor--the one to which lenders should pay attention.

Mortgage lending as a manufacturing process

For the lender, the supply chain reaches from lead generation and
the point of sale to fulfillment and the sale of loans in the secondary
market. If the activities that take place at the POS don't
integrate with fulfillment, workflow efficiency is lost (and service
suffers). If workflow does not involve suppliers systemically, an
opportunity to improve efficiency is wasted.

Wal-Mart excels at business process efficiency. It is specifically
acknowledged for innovation in the supply-chain arena, which shares many
process concepts with manufacturing.

A study by New York-based McKinsey & Company determined that
Wal-Mart was singularly responsible for about 12 percent of all
productivity gains during the last half of the 1990s. This is an utterly
astounding statistic, given the massive size of the U.S. economy.
Wal-Mart has achieved these gains using what is analogous to
activity-based cost modeling. Bankers often do not have sufficient
information about a particular product or process to manage its cost.
Wal-Mart does--to the fraction of a penny.

Should a lender centralize processing for Federal Housing
Administration (FHA) and Department of Veterans Affairs (VA) loans, or
train every processing group to handle all product lines? Is it worth
the investment to automate a function that happens manually on 1 percent
of the bank's mortgage lending transactions? Are products that have
unique processes driven by state-level regulation profitable at the
given volumes?

Ask most lenders how much it costs to fulfill a loan, and they take
their total known costs and divide them by the number of loans. When
Wal-Mart gets into lending, it will know how much it costs to do initial
underwriting of cash-out refis in Orange County, California, and, more
important, it will know that it will cost 3.5 percent less next year.

In a lesson learned from U.S. efficiency expert W. Edwards Deming and applied with devastating effectiveness by leading Japanese
manufacturers, Wal-Mart focuses on continuous incremental improvement,
driving out costs a few pennies at a time over an extended period. In
lending, this may be as simple as replacing a fax with a document
delivered electronically. In and of itself, the savings in time and
money is barely perceptible; but multiply it by millions of
transactions, and pretty soon you're talking about real money. The
Japanese didn't design in efficiency with one big systems release;
they designed a continually improving process and focused on executing
the process over time. Measure, adjust, repeat.

An adjunct to this is profitability-driven behavior. Is the new
product you want to introduce going to drive profits in line with your
business plan? How can you know, if you don't have a good picture
of what it will cost to originate? Banks may launch a new loan program
without a good idea of what it will cost. Wal-Mart would never roll out
a new product without understanding how it will impact costs throughout
the organization.

The supplier-retailer relationship

Wal-Mart is notorious for leaning on its suppliers to drive down
prices, but this process is not just about saving money. Simply shifting
execution costs to a supplier will not drive the long-term improvements
in banking that the big retailer gets. One of the most forward-thinking
behaviors at Wal-Mart is its willingness to invest proprietary knowledge
and processes into its supplier base to improve quality and drive costs
out of the business.

A well-documented example is the relationship between The Procter
& Gamble Co. (P & G), Cincinnati, and Wal-Mart (as outlined in
the report, Supply-Chain Integration Through Information Sharing:
Channel Partnership Between Wal-Mart and P & G, by The Procter &
Gamble Distributing Co. and the University of Illinois at
Urbana-Champaign). It warrants a closer look.

P & G and Wal-Mart didn't start out working well together.
In fact, Wal-Mart considered P & G one of its worst suppliers. The
relationship was both adversarial and tactically oriented.

P & G's organization and processes were far too
complicated for Wal-Mart's efficiency-oriented culture. P & G
operations focused on delivering day-to-day results--strategic planning
was not part of its account plan. In addition, P & G didn't
leverage systems that could support a relationship as large and broad as
was warranted by a distribution giant like Wal-Mart.

The keys to transforming their relationship and unlocking value on
both sides were first to recognize the opportunity, and second, to begin
the process of enabling interoperation between the companies'
systems. Research in inter-operational information systems has
identified three distinct levels: transactional, operational and
strategic. Over time, the P & G/Wal-Mart relationship evolved
through all three phases and has yielded tremendous value to both
companies.

Their mutual business has grown more than tenfold since 1988, with
increasing profitability for both. The companies even went so far as to
develop a joint mission statement: "The mission of the Wal-Mart/P
& G business team is to achieve the long-term business objectives of
both companies by building a total system partnership that leads our
respective companies and industries to better serve our mutual
customer--the consumer."

* Integration of POS information (actual demand) from Wal-Mart
systems with P & G's consumer data on why products were
selling, trends and analysis. These combined data were unique in the
market, and provided insights that allowed both improved retailing and
product-development decisions.

* P & G reduced product-ordering times by three to four days
using cross-company systems integration--the so-called continuous
replenishment process (CRP).

What is most interesting about this example is that both companies
made investments in joint activities to increase profits. This kind of
success is impossible in an adversarial vendor/buyer relationship in
which suppliers are treated as disposable commodities.

The impact that technology had on their success was critical, but
was secondary to that of aligning strategic vision and operating
procedures, and of building trust. As a result, the technologies that
were put in place were able to have a far greater impact on efficiency
than they would have if the relationship had been less complementary.

The lessons here? Make volume commitments that warrant investment
by both parties. Create transparency on both sides. Because no company
can invest in an unlimited set of relationships, narrow the supplier
base.

In lending, now that service-oriented architectures (SOAs) and
MISMO[R] are becoming more widely adopted, the barriers to entry and
exit for partner relationships are greatly lowered. The risk of
obtaining all of your services from one provider goes down dramatically
because the provider knows it must maintain its service levels or risk
being replaced, quickly and cheaply.

Finally, negotiate aggressively with your mortgage lending process
partners, but be willing to take responsibility for the economic success
of the vendors you ultimately select.

Ability to adapt

A business' willingness to be flexible and adapt quickly to
shifts in business conditions (a drop-off in originations, or the sudden
popularity of a new product such as fixed-rate, interest-only loans) is
ineffectual unless its infrastructure can allow change to be implemented
quickly and with minimal cost. Wal-Mart invests in process technology
with this in mind, and lenders should, too.

Wal-Mart makes technology investments that are informed by a
holistic strategy emphasizing the integration of business processes
across all facets of execution. Absent the ability to execute, notions
like cost-based modeling and continuous improvement are just so much
business-school jargon. Implementation requires investing in a platform
and point technologies that can continuously adapt. Wal-Mart has done
this in retailing, and now stands poised to bring that same approach to
banking.

As a distributor, Wal-Mart must be effective at managing demand.
Planning and responding to demand are a religion at Wal-Mart. During
busy shopping seasons, Wal-Mart sales and operational executives meet
daily to review performance data from the previous day. They actually
collect, aggregate and analyze sales data from across their massive
network of stores in less than 12 hours.

The outcomes of these meetings are immediate adjustments in pricing
and product strategy. Their unified point-of-sale and supply-chain
systems allow them to quickly react--not to expected market swings, but
to actual customer and operational data.

For most lenders, core pricing for products is done in the back
office, and demand-level pricing is done in the front office via
marketing subsidies and the like. There is virtually no visibility of
the front-office pipeline in the back office. In most cases, the first
time the back office sees a loan is when it is locked.

Near-real-time, demand-based pricing is uncommon in today's
lending operations. But what a tremendous competitive advantage it can
be. Product-flow efficiency can increase profitability in a number of
areas: sales expense, product margin, operations and hedging.

Because its vendors are integrated into its systems and have access
to some of the same data, Wal-Mart's decisions to push one product
or pull back on another are transparent to the vendor. This transparency
drives operational efficiency for the vendor/supplier, and gives
Wal-Mart great leverage during vendor negotiations.

Consider the possibilities of having this sort of relationship with
your credit providers, title providers, appraisers and others. They can
know and anticipate fluctuations in your volume and react with improved
service-level agreements (SLAs), differentiated pricing or entirely new
products. In lending, on-demand and network-based POS and LOS platforms
are making this kind of lender/vendor transparency a reality.

Wal-Mart's move toward radio frequency identification (RFID)
is big news these days. (RFID involves small tracking chips that
essentially offer the same functionality as bar codes, but use wireless
readers.) It originally perfected the use of bar codes to gather sales
data. Wal-Mart is now requiring its top 100 vendors to use RFID
technology. It expects to save more than $8 billion using RFID
technology. Wal-Mart uses those savings to drive down prices, increase
market share and scale, and continue to compound its operational
advantages.

We have seen movement over the past couple of years toward
eliminating much of the paper in the lending process. (I'm always
amused when I answer security-related questions about our software, and
then walk through the lender's building with stacks and stacks of
mortgage documents lying out on every available flat surface.)
Technologies like bar coding, imaging systems and data capture all have
well-documented benefits. The data standards coming out of MISMO are
only at the earliest stages of yielding real benefit. However, it is
difficult to yield maximum value from these technologies when the
overarching processes are managed disjointedly across islands of
functionality.

Every major lender has invested heavily in an enterprise-level
imaging platform. However, in many cases these systems are only deployed
at the end of their process--after the loan is closed--simply because
the systems at the POS or fulfillment stage are not capable of
integrating effectively with outside systems. In these cases, documents
and the associated data are rarely in the same system. Consequently,
much of the value of the imaging system is not being realized.

How much time is lost in your lending process simply by moving
documents among the originator, the processor and the underwriter, and
then on to shipping? The opportunity cost associated with perpetuating
these inefficiencies is rivaled only by the actual cost of doing
business this way.

Wal-Mart does something I see rarely in lending--it develops and
manages processes and systems together. Systems don't drive
processes. And inefficient legacy processes aren't allowed to
survive and be re-implemented in new systems.

Wal-Mart is the ultimate agile operation. Its scale allows it to
constantly invest, driving incremental cost of out the system. Dr.
Deming would be proud.

Dain Ehring is chief executive officer of Dorado Corporation. San
Mateo, California. He can be reached at dehring@dorado.com.

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